United Auto Credit Corp. had to pay up for a triple-A credit rating on its latest offering of bonds backed by subprime auto loans.
The senior tranche of the $147.5 million transaction, which is rated triple-A by both S&P Ratings and DBRS, benefits from initial credit enhancement of 60.48%, more than six percentage points higher than the 53.9% on its previous transaction, completed in 2016.
In a pre-sale report, S&P noted a “mild” deterioration in credit metrics on the initial, $111.58 million pool of collateral. The average FICO score has risen, to 577, which lessens risk; while the average loan-to-value ratio rose slightly to 107.43% from 106.52% in the previous transaction. The percentage of longer-term loans (49-66 months) in the pool, another risk, also rose, to 26.04%.
That’s not the only reason S&P expects cumulative net losses for United Auto Credit Securitization Trust (UACST) 2017-1 to be higher (21%-22% vs 19.5%-20.5%) than for the previous transaction, however. The ratings agency also cited new repossession fees applied by United Auto on liquidation proceeds, a move that will lower recoveries and increase net losses.
The credit enhancement for the Class A notes consists of 2.00% reserve account (of the initial pool balance, funded at inception and non-declining), initial overcollateralization of 11.50% (of the initial pool balance) and subordination of 46.98% of the initial pool balance. While the initial credit enhancement gap is significantly larger in the new UACST deal (11.5% to 8.75%), the target CE will end up more closely aligned with that of United's 2016-2 transaction from last September. In fact, the target OC level of 16% in 2017-1 will be lower than the 16.5% in 2016-2; the prime difference is the higher senior note surbordination of 46.98% vs. 43.15% in the United's prior securitization.
UACC is far from the riskiest subprime auto lender. The company, which is based in Newport Beach, Calif., originates collateral, which generally has shorter term, higher down payment, low book value and higher borrower income requirements than some sub-prime auto loan originators, according to DBRS.
The loans in the collateral pool for the latest deal have an average principal balance of $8,231 on cars averaging 114,000 miles. The weighted APR for the pool is 23.14%. The company does not originate the loans, but instead purchases loans issued by franchised and independent dealers using United Auto’s criteria.
The transaction uses a prefunding account that is approximately 25% of the expected aggregate collateral pool, according to DBRS. The additional collateral must be acquired by Sept. 7, 2017
As of March 31, United Auto’s managed portfolio totaled $360.4 million.
